According to the European Commission’s Competition Directorate (DG COMP), which sets competition (antitrust) policy for the European Union (EU), so-called grant-back clauses are potentially anti-competitive (and therefore illegal) in IP licence agreements.
What is a grant-back clause?
What is a grant-back clause? It is a clause in a licence agreement that states that, if the licensee makes any improvements to the licensed technology, the licensee is required to license or assign the intellectual property in those improvements to the licensor.
In many of the licence agreements that IP Draughts encounters, a grant-back clause would be considered normal and uncontroversial by both licensor and licensee. Consider the example of a technology in the consumer electronics field. The licensor is a small start-up business that has lovingly developed this technology over several years, from its origin as the bright idea of an electronics student to the point of bringing to market a commercial product. It doesn’t have the resources or experience to make and sell the product on a large scale, and it appoints an exclusive licensee for the EU territory who has experience of selling consumer electronics, and who will manufacture and sell the product. Or, to be accurate, the licensee will arrange manufacture by a sub-contractor in China.
In a recent transaction between EU-based parties, in which IP Draughts was involved, the parties discussed whether the product might need to be modified by the licensee so as to make it better from a technical or marketing perspective. During this conversation, the licensee commented, without prompting, that “of course” the licensor would own these modifications and would be free to use them after the agreement came to an end. This ownership position would be achieved by including a grant-back clause in the licence agreement.
Simple, you might think. If the licensee is willing to accept a grant-back clause, how could it possibly be anti-competitive?
Perhaps it wouldn’t, but it would be a brave lawyer who would advise that there was no risk of a breach of Article 101 of the Treaty on the Functioning of the European Union. Let’s consider why this might be.
DG COMP’s view of grant-back clauses
Stating the EU legal position on grant-back clauses accurately requires a host of qualifications, which are tedious but necessary. In the opinion of DG COMP, certain kinds of grant-back clauses, namely assignments-back and exclusive licences-back of licensee improvements, but not non-exclusive licences-back, are potentially anti-competitive. And this only applies if the agreement is sufficiently significant to affect trade between member states of the EU and is therefore subject to Article 101 of the TFEU.
So, you can drive a coach and horses through the qualifications, and the issue goes away, particularly if the licensee is willing to accept the grant-back clause? Not really. Let’s consider the issues in turn.
- Does the agreement affect trade between member states, so that it is subject to the Article 101 regime? The case law does not suggest that an exclusive licence agreement covering multiple territories in the EU would fall outside the EU antitrust regime.
- Does DG COMP’s opinion matter; surely what counts is whether there is a law prohibiting grant-back clauses? Unfortunately, Article 101 is expressed in rather general terms, and it is necessary to look at case law and practice to understand which clauses – other than the obvious no-nos such as price fixing clauses – would fall foul of Article 101. A significant part of that exercise is looking at what DG COMP considers to be in breach of Article 101.
- Surely if the parties have specifically agreed to a term, it can’t be anti-competitive? Unfortunately, this argument is flawed. By definition, parties who have entered into an anti-competitive agreement have agreed the offending terms. There is no principle, as far as IP Draughts is aware, in the jurisprudence, that says that if a licensee volunteers the suggestion of anti-competitive term, that makes it alright.
It is open to parties to undertake their own economic and legal analysis of the market, their position within the market, the effect of the term, etc, and conclude that a term is not anti-competitive. However, this may not cut any ice with the court or DG COMP, if the matter comes to be investigated or litigated. There are so many judgment calls in competition theory – what is the relevant market, how open is the market, etc, etc – that it is difficult to predict how another economist or lawyer would view the matter.
In any case, most parties don’t have the budget or stomach for undertaking an analysis of this kind. Instead, many parties prefer to fit their agreement within one or both of the Technology Transfer Block Exemption Regulation (TTBER) or DG COMP’s Guidelines on Technology Transfer Agreements.
So, what do these documents say about grant-back clauses? First, the Guidelines, which include the following text:
An obligation to grant the licensor an exclusive licence to improvements of the licensed technology or to assign such improvements to the licensor is likely to reduce the licensee’s incentive to innovate since it hinders the licensee in exploiting the improvements, including by way of licensing to third parties.
The application of Article 5(1)(a) [of the TTBER] does not depend on whether or not the licensor pays consideration in return for acquiring the improvement or for obtaining an exclusive licence. However, the existence and level of such consideration may be a relevant factor in the context of an individual assessment under Article 101. When grant backs are made against consideration it is less likely that the obligation creates a disincentive for the licensee to innovate. In the assessment of exclusive grant backs outside the scope of the block exemption the market position of the licensor on the technology market is also a relevant factor. The stronger the position of the licensor, the more likely it is that exclusive grant back obligations will have restrictive effects on competition in innovation. The stronger the position of the licensor’s technology the more important it is that the licensee can become an important source of innovation and future competition. The negative impact of grant back obligations can also be increased in case of parallel networks of licence agreements containing such obligations. When available technologies are controlled by a limited number of licensors that impose exclusive grant back obligations on licensees, the risk of anti-competitive effects is greater than where there are a number of technologies only some of which are licensed on exclusive grant back terms.
Thus, DG COMP’s position on this issue is nuanced, and the risk of a breach may be lower if the licensor pays a market price for the grant-back. For this reason, many licence agreements that IP Draughts sees include an option to acquire rights for market value, rather than a free and automatic grant-back. Judging whether the licensor’s technology has a strong market position may be a more complex issue to resolve.
The above text refers to Article 5(1)(a) of the Technology Transfer Block Exemption Regulation, which reads as follows:
The exemption provided for in Article 2 [ie the block exemption] shall not apply to any of the following obligations contained in technology transfer agreements:
(a) any direct or indirect obligation on the licensee to grant an exclusive licence or to assign rights, in whole or in part, to the licensor or to a third party designated by the licensor in respect of its own improvements to, or its own new applications of, the licensed technology;
This is part of what used to be called the grey list, ie terms which fall outside the block exemption but which are not so bad as to be included in the list of “hardcore” clauses (formerly known as the black list).
Over to you, readers. What would you do in the negotiations described above? Would you include in the licence agreement an obligation to assign back improvements automatically and without further payment? Or an option to acquire the improvements for market value? Or none of the above?